Argentina’s Crisis Gets Kicked Down the Road, but at What Cost?

The peso drops again, inflation surges, nothing is fixed.

Argentina was able to refinance about $26 billion in maturing peso-denominated short-term debt, called Lebacs, but at a huge cost, after asking the IMF for a bailout loan – a “high access stand-by arrangement” that will come with creditor-imposed conditions – and after wild gyrations by the central bank that included blowing billions of scarce dollars to prop up the peso at dismally low levels, and jacking up interest rates three times to 40%.

The peso, which had been plunging for days despite these gyrations, plunged another 8% on Monday to ARS 25.30 to the USD, on doubts that the central bank (BCRA) would be able to refinance the Lebacs on Tuesday. On Tuesday, as the BCRA was able to “roll over” the debt, the peso bounced, but regaining only half of what it had lost during Monday’s plunge. But on Wednesday, it lost ground again, dropping nearly 1% (this chart shows the value of 1 peso in USD):

On Tuesday, BCRA announced that it was able to sell enough peso-denominated Lebacs to pay off all the maturing Lebacs ($25.6 billion at the current exchange rate) plus sell additional Lebacs worth $200 million. Instant disaster has been kicked down the road.

But at what cost? To find buyers for the Lebacs at the auction, BCRA offered interest rates ranging from 38% for the 154-day Lebac to 40% for the 36-day Lebac.

In addition, also on Tuesday, BCRA said that it sold $791 million in dollars – scare foreign exchange reserves – to buy pesos in the spot market to prop up the peso, after having already sold billions of dollars in the prior days.

“It was a successful auction,” Goldman Sachs economist Alberto Ramos told the Wall Street Journal. “But of course they had to commit to pay a very high distressed level of interest rates…this is not a sustainable path.”

Tuesday, as the dust from the Lebacs roll-over was still trying to settle, the statistics agency released the latest batch of dismal inflation figures: The consumer price index had jumped 2.7% from March to April, pushing the 12-month inflation rate to 25.5%.

After promising for months that inflation would settle down, the government revisited that promise when Treasury Minister Nicolas Dujovne, told foreign media that, due to the falling peso, he expected “somewhat less growth and more inflation.”

Even more inflation?

A further deepening of the crisis has thus been successfully kicked down the road, but a huge cost. This is the result when investors that are supposed to fund the governments’ promises keep getting burned by years of currency devaluation, run-away inflation, serial defaults, widening deficits, and large amounts of foreign-currency denominated debts. But for speculators trying to make a buck in this punitive environment on short-term securities offering 40% annual yield. denominated in a currency that plunges in value, it may be worth the risk.

Nothing predicted this. Except that it’s “Argentina” (eye-roll). Peso Debt (guess they call it Lebacs) to GDP is ~60%. External Short term Debt to GDP is 100+% (even more for 2015-16). That’s bad. But so is Jordan, Ukraine, Tunisia, Belarus etc. No crisis there. Turkey’s is ~90%. No problem there.

The current TBD “Time before death” of the US Dollar is at least two decades. The strongest candidate to replace it it’s the Euro but the Euro zone crisis abd banking problems scare people away from it. That’s funny because since the US dollar because the World currency the US had several economical and political crisis.

The thing is, since so many governments and rich people have so many dollars, they do not want the dollar to die.

Why do we need to read “when money dies” when we’ve been watching it in real time in Venezuela? We’re going to be like Puerto Rico in 10 years and Venezuela in 20. What’s funny is that 98% of Americans don’t know what it means to be “like Puerto Rico”. I’m referring primarily to the amount of looting by their government and secondly how their pensions have fallen flat as well, also looted. Then there are tertiary issues, also devastating.

Commonality between Venezuela and PR is the amount of fleeing. PR, they’ve all gone to mainland US as they are considered citizens. Columbia has received the brunt of the economic refugees, but they’ve scattered all over South America and of course the US somehow gets it share as always.

Last 10 years if compounded at official 2% pa CPI is still 22% increase in prices, or an 18% debasement of dollar. But considering asset inflation, not considered directly in CPI, debasement could well be 50% or more, if you’re buying assets anyway. CPI is an almost meaningless measure of ‘inflation’.
Since 1980s, dollar has lost maybe 67% of its value.

Argentina borrows for 36 days at 40% – so at 4% for the 36 day period. Meanwhile, back at the ranch, inflation rises 3%. This means that they will pay 7% for their 36 day loan. They rolled over $25 billion USD at these payday loan rates. That means an actual cost of 25 x 0.07 = $1.7 billion dollars. Have I got this right … is there some error somewhere …. it just seems quite crazy.

On this particular deal, inflation is not relevant. You need to figure in the risk of the peso losing 20% of its value in 36 days, which it did over the past 36 days since you’ll get paid in pesos when these instruments mature.

In other words, you might make 4% in interest and lose 20% in the currency (against the dollar). That’s the risk.

The buyers were betting that this won’t happen, that the peso, after the recent plunge, will stay flat or rise. That’s the bet here. If the peso rises 5% and they get 4% in interest over 36 days, they made a nice chunk of money. If the peso falls 4%, they break even. If the peso falls more than 4%, they lose.

Too much money laundering in Latin America for prices to go down. Real estate is overinflated in every city, even more so than the US when you consider how much workers make. Great deals in smaller cities though.